Reading "The Community Reinvestment Act of 1977": a basic exercise in fact-checking.

I was reading Yahoo! News this morning and stumbled upon an opinion piece titled "To boost the economy, burst the regulatory bubble", which has a lot of mindless repetition of tired talking points and not a lot of citations or sources. To refute everything would be a tedious and extended exercise in Logical Fallacies 101 and not worth my time. In essence, most of it boils down to "Evidence: you need some" and "Correlation does not mean causation". However, one part in particular caught my interest because it is something I have heard many times now, and it actually provides a source:

"But over time, as the government passed regulations such as the Community Reinvestment Act of 1977 to encourage lending to marginal borrowers, banks were pressured into unloading their loans on the government, thereby letting the taxpayers assume the risk of nonpayment. As a result, banks didn’t have to worry about nonpayment, only about how many fees they could generate by originating the loans."

So, I decided to look up the Community Reinvestment Act of 1977 (or the "CRA" for short) and actually give it a read for myself. But guess what? It looks like the author didn't, because the actual legislation itself pretty much says the exact opposite of what he claims. (Why the authors of opinion pieces on controversial issues do not do a little research is beyond me, especially when their claims could be easily refuted. Of course, opinion pieces are just that—opinion pieces—and as such, authors get a free pass to say whatever they please without citing sources to back up their claims. Sadly, too many of them abuse this free pass, but that's beside the point.)

So, what does this legislation do?

Well, the CRA is a small piece of a larger legislation known as the Housing and Community Development Act of 1977, which is intended to do, well, pretty much exactly what it says. In a nutshell, the CRA portion of this Act was devised to enable more lower- and middle-income citizens to move into their own homes and out of rental and government housing. In particular, it seeks to reduce redlining (the discriminatory practice of denying or increasing the cost of services to residents in certain low-income and oft racially determined areas). To achieve this, the CRA requires banks to lend on equal terms to lower- and moderate-income income individuals that otherwise have the exact same credit history as the higher-income borrowers which banks already lend to:

"In connection with its examination of a financial institution, the appropriate Federal financial supervisory agency shall— (1.) assess the institution's record of meeting the credit needs of its entire community, including low- and moderate-income neighborhoods..." (Sec. 804)

But that sounds a bit risky, doesn't it? (After all, it's ending money to lower-income people who are, at least theoretically speaking, less capable of paying it back.) Then let me continue. In that same sentence, the CRA continues to specifically, explicitly state that banks should not make risky loans to lower- and moderate-income individuals any more so than to other people:

"...consistent with the safe and sound operation of such institution." (Sec. 804, cont'd.)

I kid you not. That is exactly what it says, there in plain black and white for the world to see. In fact, in the very next section, the CRA requires that banks be held accountable to that. Don't believe me? You can look for yourself:

"Each appropriate Federal financial supervisory agency shall include in its annual report to the Congress a section outlining the actions it has taken to carry out its responsibilities under this title." (Sec. 805)

But, again, in the original article, the author states:

"...over time, as the government passed regulations such as the Community Reinvestment Act of 1977 to encourage lending to marginal borrowers, banks were pressured into unloading their loans on the government, thereby letting the taxpayers assume the risk of nonpayment. As a result, banks didn’t have to worry about nonpayment, only about how many fees they could generate by originating the loans."

However, as far as I can tell, nowhere in this legislation is there language that allows or encourages banks to "unload" their loans on the government. In fact, as I just showed, Sections 804 and 805 tell them just the opposite: to engage in nondiscriminatory but responsible lending because they will be held accountable for not doing so. If there are laws where the government actually tells banks "HAY GUYZ, ALL UR DEBT R BELONG 2 US, LOL GO B STOOPID", then the Community Reinvestment and the Housing and Community Development Acts aren't examples of them. (If you can find such legislation, it is indeed pretty backwards and needs to be scrapped off the books, and I would like to see it for curiosity's sake.)

Using examples that are actually, you know, examples might boost your credibility just a tad. Really, people. The facts are right in front of you. Check them, lest you spread your misinformation to others. The CRA is not a complicated piece of legislation. It's only a single page, readable to the average person (unlike the lengthy and confusing mortgage contracts issued to homeowners). The entire Housing and Community Development Act of 1977 is also just as readable to the average person, simply a bit lengthier.

References (gasp!) and Further Reading

1. The Housing and Community Development Act. Full text. Wikisource.
2. The Community Reinvestment Act of 1977. Full text. Wikisource.
3. Racial Discrimination and Redlining in Cities. Yves Zenou and Nicolas Boccard. CORE, Université Catholique de Louvain.
4. The Community Reinvestment Act: Its Evolution and New Challenges. Federal Reserve chairman Ben S. Bernanke. Federal Reserve System.
5. “The Community Reinvestment Act: Thirty Years of Accomplishments, but Challenges Remain”. House Committee on Financial Services. February 2008 hearing.